Why Wall Street Is Selling Off

Selloffs usually come from nowhere without warning, but there are usually good reasons behind them

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Wall Street was hit by a big selloff on Tuesday, catching the bulls by surprise.

In the early afternoon, the S&P 500 was trading at 4,146.30, down 1.10% for the day, while the Dow Jones was trading at 34,027.17, up 0.25%. The tech-heavy Nasdaq was hit the hardest, trading at 13,550.1, down 2.47% for the day.

Wall Street selloffs usually come from nowhere without warning, but there are always good reasons behind them. One of the reasons this time around is the realization that inflation is catching up with the economy, following a statement over the weekend by legendary investor Warren Buffett (Trades, Portfolio) that he sees very substantial inflation and that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) companies are raising prices.

Then there are the high material and commodity prices, which set the economy up for textbook cost-push inflation.

Rising inflation will eventually force the Federal Reserve to raise interest rates sooner rather than later or risk being "behind the curve." That isn't a good prospect for Wall Street, which has been used to free money fueling speculative trades.

Adding to the fears of ballooning inflation and the prospect of rising interest rates was a statement by Treasury Secretary Janet Yellenthat interest rates prevent the economy from overheating, as fiscal stimulus could quicken the pace it recovers from the pandemic.

"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat," she said during an economic seminar held by The Atlantic. "Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates."

Still, there's another reason behind this selloff: valuations. Some of the sectors hit the hardest by the pandemic had a big run-up in recent months, discounting the economic recovery. Like the restaurant sector, some listed companies are already trading well above their pre-pandemic levels, as discussed in a previous piece.

Disclosure: No positions.

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